The five percent increase in the base price of ethanol for the procurement season 2017-18 (starting December 2017) for oil marketing companies (OMCs) is likely to result in an increase in the total contribution margin by around Rs. 200/MT of sugar produced for fully integrated sugar mills, credit-rating body ICRA noted.
"During the crushing season 2017-18, mills are expected to produce around 25 million tonnes of sugar, thus registering an increase of 20 to 23 percent compared to last year. Consequently with a higher quantity of molasses available this year, the mills might achieve a 1.10-million KL of ethanol supply, with Uttar Pradesh's mills contributing nearly half of the output. With ethanol contributing nearly 10-15 percent of the sugar mills' turnover for integrated sugar mills, an upward revision in ethanol prices is expected to encourage sugar mills to enhance the supply of ethanol for blending, thereby augmenting their revenue and improving their ability to pay sugarcane farmers," said Sabyasachi Majumdar, Senior VP, ICRA.
The Cabinet Committee on Economic Affairs (CCEA) in a recent announcement had increased the basic price of ethanol by 5 percent amounting to Rs 1.88/litre for the procurement season 2017-18. This decision implies that the OMCs will be able to procure ethanol at the price of Rs. 40.85/ltr in 2017-18 as against Rs. 38.97/ltr in 2016-17 for blending with petrol.
The applicable Goods and Services Tax (GST) of 18 percent and the transport charges would be borne by the OMCs. The price increase aims at increasing the participation of the sugar mills in the EBP by providing remunerative and stable prices to suppliers and reducing the dependence on crude oil imports.
According to ICRA estimates, with the new ethanol prices, the total contribution margin is likely to increase by around Rs. 200/MT of sugar produced for a fully integrated sugar mill, which translates into a half per cent margin at the operating level. However, for a partially integrated mill, the increase in margins is likely to be proportionately lower.
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